Tech: We know how a bubble bursts

Shares soar beyond reason.

This year’s “IPO fever” is starting to feel like the mania of 1999, said Drew Singer and Elena Popina in Bloomberg.com. More than a dozen initial public offerings have surged by at least 50 percent in their debuts this year, including raucous first-day pops for the cybersecurity firm Crowdstrike (87 percent), freelancer platform Fiverr (90 percent), and the online pet-supply marketplace Chewy (88 percent) last week. The lackluster debut of Uber and second-day free fall of Lyft, the two biggest of the so-called unicorns—venture-backed billion-dollar startups—didn’t quell the buzz around other companies coming out of the gate. But with more big-name IPOs on the horizon, including WeWork and Airbnb, analysts worry that the euphoria will have a familiar aftermath. “It seems to be mindless,” says one analyst, “and it won’t end well.”

The most dubious of the IPO darlings is Beyond Meat, said Brian Sozzi in Yahoo.com. On Day 1, the faux-meat company exploded to end an eye-catching 163 percent above its IPO price of $25—and that was only the beginning. Shares have since gone up more than 550 percent, despite the fact that every Wall Street analyst has warned investors not to touch it. The company doesn’t make money, and the “insane reaction” by investors is all the more reason to suspect that “the air is quickly filling into the balloon.” When investors embrace many unprofitable companies, “it can be a sign of a bubble,” said Maureen Farrell and Corrie Driebusch in The Wall Street Journal. Consider Crowdstrike. “It has been losing money each year and expects to continue to incur net losses for the foreseeable future.” Yet it’s now worth $13 billion, more than four times what private investors thought it was worth in 2018, before it went public. One factor in the rush to buy IPO shares is that many tech firms are quickly being gobbled up by larger companies, so there are simply fewer companies to invest in. Investors looking for fast-growing companies to add to their portfolios are making little distinction between “profitable growth and unprofitable growth.”

Indeed, more than 80 percent of the new issues come from companies that are not turning a profit, said Jonathan Rochford in MarketWatch.com. The last time that happened: the Tech Wreck of 2000. Yet investors continue to buy securities “that have identical characteristics to the disasters of the recent past.” Chewy lost $268 million in 2018 on $3.5 billion in sales, which “looks an awful lot like Pets.com.” And money-hemorrhaging WeWork still struggles to differentiate itself from the office-space firm Regus, which went bankrupt in 2003. “One of the hallmarks of the Tech Wreck was dodgy financial information and dubious measures of success.” You’ll find much of the same snake oil now, from companies creating “bizarre financial terms” to make it seem as if they are close to making a profit, excluding expenses such as taxes, stock grants, marketing, and administrative costs. If you’ve never seen a tech bust, “brace yourself,” because history gives us a very clear guide to what happens next. If you have, and you’re falling for this one, it’ll be very embarrassing to get fooled a second time. ■